Solicitors as agents

The Bell Group litigation was a big one.  Richard Ackland reports on Justice Owen’s attempts to make more enjoyable the process of writing judgment in a matter the trial of which went for 400 days over 3 years.  You will be relieved to know that I have not read The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239.  But I did have a look at it.  The penultimate paragraph (no. 9761) reads:

‘From time to time during the last five years I felt as if I were confined to an oubliette. There were occasions on which I thought the task of completing this case might be sempiternal. Fortunately, I have not yet been called upon to confront the infinite and, better still, a nepenthe beckons. Part of the nepenthe (which may even bear that name) is likely to involve a yeast-based substance. It will most certainly involve a complete avoidance of making decisions and writing judgments.’

(I am interested to know what others think “(which may even bear that name)” means.  There is certainly a winery named Nepenthe, but it seemed more likely to me that the drug of forgetting Justice Owen had in mind was in fact Westralian beer — perhaps Little Creatures as an antidote to the behemoth that was this case.)

But blow me down if there isn’t something of interest to this blog: an analysis of the solicitor qua agent of the client, and the imputation of knowledge from the one to the other.  I’m sure the time will come soon enough when I will be glad of Justice Owen’s industry, and pleased with myself for squirrelling this passage away.  Here goes:

‘30.2.3. The general principles of agency

6166    The plaintiffs bear the onus of establishing the existence of an agency arrangement. Agency is a fiduciary relationship that arises where the parties mutually consent for the agent to act on behalf of, and under the control and direction of, the principal in respect of a defined matter. The agent also has the authority to affect the principal’s legal relations with third parties: see, for example, International Harvester Co of Australia v Carrigan’s Hazledene Pastoral Co (1958) 100 CLR 644, 652, Petersen v Moloney (1951) 84 CLR 91, 94. It does not matter that the agent only has the power to affect the principal’s legal relations in a minor way: Dal Pont GE, The Law of Agency (2001) [4.9].

6167    A party who is an agent for another may not always be acting in that capacity in its dealings with the principal. Acts by the agent that do not relate to the defined matter are beyond the scope of the agency relationship.

6168    These elements are relatively uncontroversial. But as will become evident, the nature of an agency relationship takes on considerable importance in relation to Westpac and Lloyds Bank, who are alleged to have been agents for the Australian banks and the Lloyds syndicate banks respectively. It is arguable that Westpac and Lloyds bank were merely ‘conduits’, ‘facilitators’ or ‘administrators’ in the negotiations to refinance the Bell group’s borrowing. On the banks’ argument, Lloyds Bank and Westpac had no authority to affect the other banks’ legal relations with third parties, other than for a very limited purpose (for example, seeking legal advice). Whilst they may have been the banks’ agents for the purpose of obtaining legal advice, they did not have the power to affect the banks’ legal relations with the Bell group in any way. Therefore, in the course of the negotiations with the Bell group, Westpac and Lloyds Bank would not be agents because of the absence of discretion and decision-making power.

6169    However, it seems to me intuitively strange that if an agent is granted actual or ostensible authority by another to accept information on its behalf, the principal can avoid the imputation of knowledge acquired by the agent acting in that capacity simply because the agent has no power to affect legal relations. There are some cases that support the view that an agency arrangement can arise where the alleged agent has authority that falls short of the ability to create legal relations between the principal and third parties.

6170    Dixon J touched on this issue, in obiter comment, in Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41, 48 – 49. His Honour distinguished between persons engaged to act on behalf of another in a representative capacity, and those merely engaged to work for another – the latter being an independent contractor not an agent. Dixon J then said, at 48 – 49:

But a difficulty arises when the function entrusted is that of representing the person who requests its performance in a transaction with others, so that the very service to be performed consists in standing in his place and assuming to act in his right and not in an independent capacity. In this very case the ‘agent’ has authority to obtain proposals for and on behalf of the appellant; and he has, I have no doubt, authority to accept premiums. When a proposal is made and a premium paid to him, the Company then and there receives them, because it has put him in its place for the purpose. This does not mean that he may conclude a contract of insurance which binds the Company. It may be, and probably is, outside his province to go beyond soliciting and obtaining proposals and receiving premiums; but I think that in performing these services for the Company, he does not act independently, but as a representative of the Company, which accordingly must be considered as itself conducting the negotiation in person. (emphasis added)

6171    In Permanent Trustee Australia v FAI General Insurance Co Ltd [2001] NSWCA 20; (2001) 50 NSWLR 679, Handley JA made some obiter comments that are relevant in this respect. His Honour discussed the difference between ordinary cases of agency and cases where the agent is an ‘agent to know’. In the latter instance, where the agent is authorised to enter into a transaction in which his own knowledge and abilities are required, material knowledge acquired outside his capacity as agent may also be imputed to the principal. In this context, Handley JA said, at [87]:

In many of the imputed knowledge cases, the agent concerned had no authority to commit the principal to the transaction in question and was not engaged in negotiating that transaction. The duty, if any, of the agent in what I will call mere notice cases was simply to communicate information to the principal so that it could be acted on by others. It is understandable that in cases of that description the agent would ordinarily have no duty to pass on information received otherwise than in the course of his agency. The situation is quite different where the agent has active duties to perform and has knowledge present to his mind, however, acquired, which is relevant to their performance.

6172    I am not clear about the nature of the other cases to which Handley JA was referring. The preceding cases discussed by him are not cases in which the ‘agent’ had nothing more than the mere power to receive notice or exchange information. Handley JA appears to suggest that a party can be an agent if they are authorised by another to receive communications on the other party’s behalf. If that is the case, it has to be reconciled with the general principle that an agent is a person who has the ability to affect the principal’s legal relations with third parties.

6173    It must be asked, then, whether the ability merely to receive and communicate information on behalf of another is enough to constitute a power to affect legal relations with third parties. Although receipt of information may be said to have legal implications (as is evident from the present case), it does not, by itself, demonstrate an ability to create legal relations. Of course, there may be situations in which an ‘agent’ is vested with authority to receive information that does affect legal relations. An example is the authority to receive contractual offers and acceptances. But such examples involve a conferral of authority above and beyond the ability to receive merely factual information, which is all that exists (on the banks’ argument) in the present case.

6174    The question whether a party who is engaged to pass on information is an agent was considered in Henderson v Amadio Pty Ltd (No 1) (1995) 62 FCR 1. It was held that accountants who were given authority to pass on information, but nothing else, were not agents. Henderson involved a group of solicitors who undertook to act, not in their capacity as solicitors, but as promoters of an investment scheme. It was held that the solicitors were not the agents of the vendors since they acted on behalf of the purchasers in organising the investment. But, more relevantly, an issue of sub-agency also arose as to whether the accountants, who had been engaged by the solicitors, were agents of the solicitors. The solicitors conveyed information to the accountants, knowing and intending that the accountants would pass that information on to prospective investors. It was held that there was no agency relationship, given the accountants’ lack of ability to affect the legal relations of the solicitors. Nevertheless, the misleading and deceptive information passed on by the accountants was held to be actionable against the solicitors.

6175    In Cornwall v Rowan [2004] SASC 384; (2004) 90 SASR 269, the Court commented, at 479:

In Petersen v Moloney (1951) 84 CLR 91, Dixon J, as he then was, referred to agency covering a person who is able, by virtue of the authority conferred upon him, to create or effect legal rights and duties as between another person, who is called his principal, and third parties. A person who has the authority to act on behalf of a principal, either generally or in respect of some particular act or matter, is an agent: see Erikson v Carr (1945) 46 SR (NSW) 9. What is critical to the legal concept of agency is that the agent represents the principal.

6176    The last sentence, in particular, points to a possible resolution. The authorities often say that the critical element is the ability of the ‘agent’ to create legal relations on behalf of the principal with third parties: see, for example, International Harvester. But equally, many authorities phrase this requirement in a slightly different way: the critical element is the ability of the agent to represent the principal in law. This phraseology is evident in Erikson v Carr (1945) 46 SR (NSW) 9 and Cornwall v Rowan. It is also mentioned in Dal Pont GE, The Law of Agency (2001) [4.9]. This element is consistent with Dixon J’s use of the term ‘representative’ in Colonial Mutual Life and it conforms with the approach Handley JA took in Permanent Trustee v FAI. The two phrases are often used interchangeably, but they are not quite the same. A party who is given authority to receive notice or communications on behalf of another may not have the power to create legal relations with third parties. This party, however, is acting in the capacity of the ‘principal’ by receiving communications from the third party, such that the communication to the ‘agent’ is taken to be communication to the ‘principal’. If such a view is taken, it would avoid the difficulty where a party could be permitted to hold out another as being legally capable of receiving communications on its behalf, then disclaim knowledge of the information received by that party on the basis that the party had no authority to act in a way that would bind it to a third party.

6177    This problem also arises when looking at whether the banks’ solicitors were agents of the banks. It is often stated as a settled principle that a solicitor is an agent for the client. However, decisions cited as authority for this proposition are, generally speaking, ones in which the client is involved in litigation or in which the solicitor is authorised to carry out the legal aspects of a transaction. In such circumstances, there is an express or implied authority to act on behalf of the client in all matters that may reasonably be expected to arise for decision in the course of the proceedings, subject to those matters in which the client’s consent is specifically required: Spedley Securities Ltd (in liq) v Bank of New Zealand (1991) 26 NSWLR 711, 729 – 730; Sargent v ASL Developments Ltd (1974) 131 CLR 634; Forestview Nominees Pty Ltd v Perron Investments Pty Ltd (1999) 93 FCR 117.

6178    The position is not as clear when a solicitor is engaged in a purely advisory role. It is difficult to see how a solicitor who is retained to do nothing more than provide an opinion has any power to affect the client’s relations with third parties. In the present case, the solicitors were not acting on behalf of the banks in litigation or anticipated litigation. They did not have express or implied powers to, for example, deal with an opposing party and their lawyers, compromise claims or make decisions about waiving privilege: Spedley Securities. It has been observed that the extent of the lawyer’s authority may be more readily inferred to be of a wider compass in the context of litigious business than in the context of non-litigious business: CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 23 ABLR 401 (Kirby P).

6179    A lawyer’s retainer carries with it the implied authority to do all things incidental to the object of the representation: Polkinghorne v Holland (1934) 51 CLR 143. ‘The attorney is the general agent of the client in all matters that may reasonably be expected to arise for decision in this cause’: Prestwich v Poley (1865) 18 CBNS 805, 816; 144 ER 662, 666. But where a solicitor’s role is purely advisory, there are no decisions, in the legal sense, that need to be made. Dal Pont discusses in The Law of Agency, at 196 – 198, the various powers that may be implied in a solicitor’s retainer, including the authority to institute proceedings, the authority to contract, the authority to incur costs and the authority to compromise. But other than the ability to incur costs, all these powers would only arise when the solicitor is acting in a legal dispute, as opposed to a drafting or advisory role. In addition, the authority to incur costs does not of itself carry with it an ability for the lawyer to affect the client’s legal relations. If this were so, most independent contractors would be agents.

6180    The conflict is evident in Dal Pont GE, Lawyers’ Professional Responsibility, (2nd ed, 2001). The author notes, at 46, that the critical element of agency is that ‘the agent is conferred an authority the exercise of which affects the principal’s legal relations with third parties’. But then, at 49, he comments that ‘the lawyer/client relationship is perhaps the paradigm example of an agency relationship’ and that a lawyer is ‘in a powerful position to affect another’s legal position’. I am not sure how this fits with a situation where a lawyer is merely asked for an opinion.

6181    I have been unable to find a case in which the knowledge of a solicitor who is merely engaged to provide advice has been attributed to the client. However, it would seem logical that where a solicitor obtains information in the course of advising a client, that knowledge should be imputed to the client. This is so because the solicitor is, in effect, acting as the representative of the client in obtaining that information.

6182    There are numerous cases in which a solicitor has been engaged to manage the legal aspects of a particular transaction, such as the sale of land, and the courts have been prepared to impute knowledge acquired by the solicitor in the course of facilitating that transaction to the client. It could be said that the present case is not dissimilar. The banks’ solicitors were engaged to manage the legal issues arising from the proposed refinancing transactions. Perhaps the answer is to take a broad view of the phrase ‘affect legal relations’ so that it includes receiving knowledge of facts that would affect a party’s legal ‘situation’. In other words, if knowledge or information is received that would have the effect of making a particular course of action more (or less) legally desirable, it could conceivably be said to fall within the category of affecting a party’s legal relations.

6183    Rolland v Hart (1871) LR 6 Ch 678 is a case in which the nature of the solicitor’s retainer played a part in the reasoning. Lord Hatherley said at 682:

The purchaser of an estate has, in ordinary cases, no personal knowledge of the title, but employs a solicitor, and can never be allowed to say that he knew nothing of some prior encumbrance, because he was not told of it by his solicitor. It cannot be left to the possibility or the impossibility of the man who seeks to affect you with notice being able to prove that your solicitor did his duty in communicating to you that which, according to the terms of your employment of him, was the very thing which you have employed him to ascertain.

6184    Similarly, Stephen J in Sargent v ASL Developments noted, at 649, that where a client authorises his solicitor to carry out a conveyancing transaction on his behalf, he ‘thereby not only authorizes his solicitor to perform all necessary steps but also places the solicitor in the position of acquiring at firsthand knowledge of relevant facts, at the same time depriving himself of the opportunity of acquiring such firsthand knowledge.’ The policy is no different here. Where a solicitor stands in the shoes of the client and holds himself out as being able to receive information on the client’s behalf and does in fact acquire material information in the course of advising a client, the logical consequence would seem to be that the information will be imputed to the client.

6185    In this litigation, the lawyers were asked to do more than simply give an opinion. They prepared and settled documents and advised on a broad range of issues that arose during the negotiations. I think it is appropriate to take an expansive approach to questions of knowledge and agency as between solicitor and client in the circumstances in which the banks and their legal advisers found themselves in 1989 and 1990.

30.2.4. Attribution of the knowledge of agents to principals

6186    The general principles that explain the circumstances in which the knowledge held by an agent may be imputed to the principal are well settled.

6187    A principal will only be fixed with knowledge held by the agent if the agent acquires knowledge of something material to the transaction for which he is responsible whilst acting in the course of, and within the scope of, his authority. Further, the circumstances must be such that there is a duty on the agent to communicate that information to the principal. In such circumstances, the principal will be deemed to have constructive knowledge from the time when the principal would have received the information had the agent acted with due diligence: see Wyllie v Pollen (1863) 3 De G J & S 596, 601; El Ajou (703 – 704); Sargent v ASL Developments Ltd (1974) 131 CLR 634.

6188    As the banks put it in their closing submissions, the court must determine three things. First, the precise parameters or scope of the agent’s authority, both substantively and temporally. Secondly, whether the knowledge in issue was obtained in the course of that authority. Thirdly, whether the knowledge is relevant to the authority. Evidently, a party who acts as agent for another will not always act in that capacity. It will be necessary to look at any contractual terms and any implied terms based on the nature and history of the agency relationship to determine whether the ‘agent’ was acting in that capacity when he or she acquired the relevant knowledge. The court must also enquire whether there was a duty to communicate the information. This may be found as a term of the agency agreement; otherwise, it may be inferred from the relevance and proximity of the information to the agent’s scope of authority. There is a duty to communicate every material fact acquired in the course of the business in which the agent is engaged to the principal: Blackburn, Low & Co v Vigors (1887) 12 App Cas 531.

6189    Where an agent has actual or apparent authority to receive formal notification from a third party, notification to the agent within the scope of that actual or apparent authority will effectively bind the principal regardless of whether the principal actually receives the information: Bowstead & Reynolds on Agency, [8-204]; El Ajou (703) (Hoffman LJ). The situation is different where the third party knows that the information will not be passed on to the principal.

6190    There are exceptions to the general rules of imputation that increase the burden on the principal. These exceptions are described in Bowstead & Reynolds on Agency as follows:

Where an agent is authorised to enter into a transaction in which his own knowledge is material, knowledge which he acquired outside his capacity as agent may also be imputed to the principal.

Where the principal has a duty to investigate and make disclosure, he may have imputed to him not only facts which he knows but also material facts of which he might expect to have been told by his agents; unless the agent was defrauding the principal in such a way as to make certain that he would not disclose the facts to the principal. (footnotes omitted)

6191    The plaintiffs do not rely on either of these exceptions (‘agent to know’ or ‘agent to investigate’) in their agency case. As a result, I do not need to consider the law in this area.

6192    Conversely, there are times when imputation will not occur. One example is an agent acting in fraud of the principal: Aequitas v Sparad No 100 Ltd (1062).

6193    The banks contend that the plaintiffs are seeking to impute not only facts held by the banks’ agents but conclusions, beliefs and suspicions arising in the minds of the agents from those facts. They say that generally only raw facts can be imputed. They rely on Vaughan v Byron Shire Council [1999] NSWCA 235, a case where a solicitor acquired a sewerage plan in the course of acting for his clients (the plaintiffs). The plaintiffs sought to rely on the property boundaries as set out in the sewerage plan as part of an estoppel defence to an encroachment action. It was held that the solicitor ought to have known that the sewerage plan should not have been relied on for such a purpose (and he would have been negligent if he did). However, this opinion was not brought home to the principal via the agency arrangement. Handley JA said, at 326:

Knowledge of facts obtained by a solicitor in the course of acting for a client in a conveyancing transaction is imputed to the client (Sargent v ASL Developments Ltd (1974) 131 CLR 634, 649 per Stephen J), but it is not clear that knowledge of the significance of those facts will be imputed in the same way … the knowledge that an agent ought to have but does not is not imputed to his principal although it may constitute constructive notice for some purposes.

6194    This case would seem to be limited to situations involving knowledge that an agent ought to have, but does not. Agents are often engaged for their particular abilities and experience to act for the principal in matters in which the principal has a lesser ability. In such a situation, it may well be within the scope of the agent’s authority to form and communicate any opinions, beliefs or suspicions arising from facts which may come into the agent’s possession. This would depend on the nature of the agency arrangement. But it seems to me that where the principal is expressly or impliedly reliant on the judgment and skill of the agent, the principal can be fixed with the expert comprehension of the agent regardless of whether the agent actually expressed those views. For example, if a solicitor, acting in the course of his retainer, forms a view that a certain act is unlawful or has a particular legal consequence, that knowledge, opinion or belief could be imputed to the client because it is the precise material that the solicitor is duty-bound to communicate to the client.

30.5.4. The banks’ lawyers as agents Some introductory comments

6359    In the preceding analysis, I have measured the extent to which knowledge acquired by the agent banks could be attributed to their principals by reference to the capacity of the agent banks to effect the legal relations of their principals. But it does not follow that I am required to approach in the same way the question of how much of the knowledge communicated to the various lawyers acting for the banks should be imputed to the banks. The position of the lawyers is different, for two reasons.

6360    First, to the extent the banks were in relationships in which one had the capacity as agent to alter the legal relationships of the others, it was not the sole relevant nexus. Lloyds Bank and Westpac were also principals as lenders. The lawyers were different. They had (or should have had) no interest as principals in the negotiations and the ultimate transactions. Solicitors are involved in commercial matters only as agents of their clients and not in their own behalf. There is no need for the preliminary inquiry as to the capacity in which they acquire knowledge in the course of their retainer: they do so as agents of their client.

6361    Secondly, capacity to affect legal relations of the principal seems a poor measure of duty to communicate. A solicitor’s duty to inform her or his client is not co-extensive with the solicitor’s capacity to alter the legal relations of that client. As Megarry J put it in Spector v Ageda [1973] Ch 30 (48):

A solicitor must put at his client’s disposal not only his skill but also his knowledge, so far as it is relevant; and if he is unwilling to reveal his knowledge to his client, he should not act for him.

6362    If the knowledge of the agent that is to be imputed to the principal is that which the agent is obliged to pass on, then a solicitor’s capacity to affect legal relations of the principal is an unsatisfactory measure of that solicitor’s obligation to pass on knowledge to the client as principal.

6363    That capacity is usually limited. In typical commercial negotiations, solicitors may well have authority to bind their clients as to such matters as the form of documentation or the language of a particular clause, but they will rarely have free-ranging powers to bind the client on matters of substance. It would be a narrow and artificial way of looking at things to say that a client was only to be imputed with knowledge gained by a solicitor if that knowledge was connected with the solicitor’s capacity to bind the client.

6364    While the extent of a solicitor’s obligation of disclosure is to be determined in each case by the retainer, the nature of the relationship between solicitor and client means that the obligation is broader than would be suggested by a mere measurement of the solicitor’s capacity to bind the client.

6365    In my view, a solicitor retained in the negotiations for, and the perfection of, a commercial transaction such as this is obliged to pass on to his client any information that comes into her or his possession that has a real connection with the subject matter of the transaction. This does not mean that the solicitor is obliged to pass on each an every bit of information gleaned during the course of negotiations. The question is whether the material has a real capacity to affect the client’s interests. If there is a sensible nexus between the information and the interest of the client being served under the retainer, it qualifies as what I have termed a real connection. In those circumstances the solicitor is obliged to pass on that information. And knowledge of that information is therefore to be imputed to the client as the solicitor’s principal. It is on that basis that I examine what the solicitors knew.’

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